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With the explosion of foreclosures over the last few years, lenders have become owners of commercial and residential properties in greater numbers than ever before. As a result, they are now faced with problems resulting from Chinese drywall, which was used during the construction of condominiums and single family residences throughout the Southeast.

At least 550,000,000 pounds of Chinese drywall have come into the United States since 2006. With that quantity, some experts say, you could construct 60,000 average sized homes. Press reports indicate that North Carolina Ports have received approximately 18,000,000 pounds of potentially defective Chinese drywall since 2006 and that over 2,000 homes may have been constructed in North Carolina using Chinese drywall.

It is widely recognized that gasses emitted by some of the Chinese drywall are causing corrosion in the homes. The gasses have blackened metal components such as coils and wiring, and homeowners have reported the failure of televisions, computers, and other electronics as a result.

The Centers for Disease Control (CDC), the Environmental Protection Agency (EPA) and the Consumer Product Safety Commission (CPSC) have been studying the health consequences of the gasses. At this point, no immediate health threats have been established. However, potential medical effects continue to be evaluated and additional information should be forthcoming.

Most of the Chinese drywall that ultimately was installed in the construction of property in the United States was shipped in 2005, 2006 and 2007. Therefore, many of the homes that were constructed during the residential construction boom during those years and that ultimately were part of the foreclosure boom of the last few years could have been constructed using Chinese drywall. Chinese drywall can be identified by the manufacturer identification information on the back side of the drywall. Allegedly defective Chinese drywall was manufactured by Knauf Plasterboard Tainjin, Ltd. (KPT) and Tain Taishan Plasterboard (TTP), among others. Some of the Chinese drywall is marked with “Made in China” on the back side. However, part of the challenge is that some Chinese drywall found in affected homes has been “generic”, or not marked properly to reflect its manufacturer, making tracing its origins difficult.

Lenders need to retain inspectors who are familiar with Chinese drywall issues to properly inspect commercial and residential properties after foreclosures so that Chinese drywall can be identified and remediation plans can be prepared. Remediation protocols vary, but the affected residences should be evaluated, and removal and replacement of the drywall in the affected residences should be considered. In addition, electrical systems and components should be evaluated to determine whether corrosion resulting from off-gassing of Chinese drywall has affected the performance of those systems and components.

Disclosure laws vary from state to state, but lenders should consider disclosure issues when marketing residences that may contain Chinese drywall. Potential buyers are becoming more aware of issues related to Chinese drywall as a result of media reports and federal and state government efforts to educate the public.

Lastly, litigation is an option for lenders who foreclose on properties that contain Chinese drywall. Lawsuits have been filed in Louisiana, Florida, North Carolina, and Virginia against the manufacturers, distributors, and contractors who installed Chinese drywall during construction. However, the litigation process is fraught with uncertainties because of the difficulty in securing a judgment against a Chinese manufacturer as well as the insurance coverage issues that have been asserted by the commercial general liability carriers for many of the contractors and subcontractors involved in the construction process. Ultimately, lenders should use great caution when proceeding with the foreclosure and ultimate resale of properties containing Chinese drywall.

H. Mark Hamlet is a partner in Williams Mullen’s Product Liability, Mass Tort and Litigation Practices. Please contact Mr. Hamlet at 910.442.2753 or mhamlet@williamsmullen.com with any questions about this article.
Williams Mullen Financial Services & Real Estate Quarterly Newsletter. Copyright 2010. Williams Mullen. Editorial inquiries should be directed to John M. Mercer, 804.420.6443, jmercer@williamsmullen.com or Matthew E. Cheek, 804.420.6923, . The Williams Mullen Financial Services & Real Estate Quarterly Newsletter is provided as an educational service and is not meant to be and should not be construed as legal advice. Readers with particular needs on specific issues should retain the services of competent counsel.